China Loading Up On Gold As Hedge Against U.S. Treasuries

The city is on lockdown. Street vendors are closed. Taxi drivers have been ordered to seal their windows to prevent seditious material from being leafletted in the main square. Known troublemakers? Locked up, just in case.

Another G8 or NATO summit in the West? No, it was the once-every-decade gathering of the Chinese Communist Party’s congress. The event could have swift ramifications on U.S. Treasuries, the U.S. dollar and, by extension, the price of gold.

“The [Chinese Communist Party’s] meeting’s more than 2,000 delegates choose a central committee,” explains the BBC, “which then chooses the country’s highest decision-making body, the Standing Committee of the Politburo. The process takes place behind closed doors, with the makeup of the top bodies in reality decided ahead of time.”

The outgoing speech by president Hu Jintao was refreshingly upfront by Western standards. “If we fail to handle this issue well,” Hu lamented the rampant corruption inherent in their system, “it could prove fatal to the party, and even cause the collapse of the party and the fall of the state.”

Then again, Hu’s predecessor Jiang Zemin said the same thing 10 years ago. The party was “heading for self-destruction” if they failed get corruption under control. Apparently, the Chinese take a long-range view on all plans… not just those involving economic domination of the planet.

“Its manufacturing companies face sluggish international markets,” says our macro strategist Dan Amoss. “Its banks are dealing with the fallout of a burst credit bubble; its imbalanced economy still depends on a destructive level of construction activity; and, of course, it’s undergoing the first change in political leadership in 10 years.

“Considering these challenges, China’s currency management policy has shifted. The People’s Bank of China is not nearly so concerned with providing vendor financing to China’s U.S. customers. What they are accumulating is gold, which we can see in the soaring gold imports through Hong Kong.”

Chinese imports continue to soar. In September, they totaled 69.7 metric tons — up an impressive 22% from a year earlier.

“Gold is the perfect hedge for the slowly eroding value of China’s U.S. Treasury portfolio,” Dan concludes. “After the U.S. elections revealed a country likely heading more towards a European economic model, the shift into gold should accelerate.”

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